NQ Logic

Technology | Strategy | Consulting

Skype over IP

In the last few months, the telecommunication industry has changed in such a way that technology historians would probably define the year 2010 as a stepping stone of the new telecommunication era. Most of the reasons have to do with one technology that has been used for over a decade but was never implemented the mobile landscape: Voice over Internet Protocol (VoIP).

VoIP Gaining Mobile Reach in Past 12 Months

In June 2009 T-Mobile, a German telecommunication company, replaced the much-criticized Skype ban with a € 9.95 usage charge instead in Germany, offering its 39 million customers the capability to do VoIP call on their mobile phone. In Dec 2009 the Spanish Telefónica acquired Jajah, the white label VoIP service in an all cash transaction for U$ 207 million. And most recently, in a hearing before a European Parliament committee [Jan 14], Ms. Neelie Kroes, who is proposed to be the new EU Commissioner for the ‘Digital Agenda’ (the policy area formerly known as ‘Information Society’), said that “blocking VoIP violated network neutrality,” raising the hope of all European mobile users to finally be able to use VoIP service.

On the other side of the Atlantic Ocean, after a long battle with the FCC, last October saw AT&T finally opening up its data network to VoIP calls, leading to Apple to allow iPhone, iPad and iPod touch developers to build applications that can make Internet calls over a 3G cellular network [Jan 29] (VoIP calls were already possible on Apple devices using WiFi connections). In March 03, a spokesman for Vodafone, the world's largest mobile operator, said that the company “has no restrictions on its customers using Skype,” but is “looking to introduce a range of tariffs to suit VoIP users and non-VoIP users to achieve a fair balance”. The recently introduced “Vonage World Mobile” VoIP international calling plan for iPhone and BlackBerry users is a perfect illustration that US telecommunication companies are now taking VoIP customers’ demands seriously.

Skype, meanwhile, has been recently moving aggressively in many directions.

In a partnership with TV manufacturers Panasonic, LG [Jan 05] and Samsung [Mar 02], Skype is now offering video telephone call on HDTV (High Definition TV). Using the TV remote controls, consumers can create Skype accounts, log into their existing accounts and call traditional landlines and mobile phones as well as regular Skype users via the on-screen interface of the HDTV.

Avaya, which officially closed the U$ 475 million deal for the acquisition of Nortel's Enterprise assets nearly six months after making its first public bid [Dec 18], confirmed that the company is in "talks" with Skype now that they share the same private equity owner, Silver Lake.

On the mobile device front, Skype has been implementing its new strategy. Pulling out of the Windows Mobile platform due to performance issues across an ever-increasing Windows product offering [Feb 25], Skype has decided to launch instead an iPhone application [Jan 16]. At present, Skype is still waiting for Apple to clarify when the new terms of service will go into effect for current iPhone users [Dec 28] to deploy “very soon” a new software version that take full advantage of 3G network capabilities. Finally two days ago [Mar 03] Skype announced that a new application is available for all Symbian mobile phones (read Nokia and Sony Eriksson), giving the over 200 million smartphone users the ability to do WiFi and 3G calls all over the world.

But the most exciting, game-changing news came on February 17, when the US-based Verizon Wireless, a joint venture between Verizon Communications Inc. and Vodafone Group Plc, in an attempt to compete with AT&T, said it will launch a Skype application in March on Blackberry and Android mobile phones that enables VoIP calls for those among their 91 million customers with a voice and data plan. The rumored 2-year exclusive deal (even limited) is an important step forward for Skype and also illustrates the recent shift in approach of the telecommunication companies toward Skype.

Verizon is now the second company embracing the Mobile VoIP revolution after the British telecommunication company 3, which already offers Skype for free in Britain, Ireland, Austria, Denmark, Italy and Sweden, and claims to have 40% market share of mobile broadband traffic in those countries with the help of their dedicated co-branded Skypephone. In UK, the free Skype service was launched in May 2009, and 3 says that users on its network make 3 million minutes of calls every day in the UK. Skype has now reached the 1 billion call milestone on 3's mobile network in the UK.

What is Skype Really?

Skype is a company that develops a software that allows users to make calls over the Internet to other Skype users for free, or to traditional landlines telephones and mobile phones for a nominal fee. Skype's software also offers additional features such as instant messaging, file transfer and notably, video conferencing.

The company was established around the former Kaazaa team, based on the same idea that Peer-to-Peer networking will lead the future of the Internet, and released its first public beta application in August 2003. Encouraged by an exponential user growth and a prominently disruptive business model, eBayacquired the company for U$ 2.6 billion [Oct 14, 2005]. At the time of the acquisition, Skype had been downloaded more than 182 million times in 225 countries and territories. 59 million people were registered, with more than 3 million people using Skype simultaneously at any one time. The company was flagged as one of the few success stories coming from Europe.

All these announcements followed the appointment of former executive from Shopping.com, another eBay company, Josh Silverman as CEO in 2008 [Feb 28].

Thanks to its proprietary protocol on a VoIP technology, Skype has been profitable since 2006 and has reinvested most of its revenue from interconnecting to the PSTN network to develop an appealing product. The seven-year-old company with more than 520 million users is the “largest provider of cross-border communications in the world, by far”, accounting for 12% of cross-border voice traffic around the world [Telegeography], and is well on schedule to generate its targeted U$1 billion in sales in 2011.

Why is Skype Popular?

Last year saw Skype servicing 100 billion minutes across the Internet with 33% of these minutes being complemented by video signal. At peak times (Christmas, New Year's or Mother's Day), video on Skype goes well above 50%. Last year, Skype was also accountable for 54 billion of the 406 billion (12%) total international voice minutes [Telegeography].

All these minutes were generated by the 520 million users that live in 225 countries, from Developed-to-Emerging countries (and to a lesser extent from Developed-to-Developed countries) and moving away from fixed line to mobile connection points. Whereas telecommunication companies are focusing generally on the top 30 and most profitable inter-country highways (called “corridors”) Skype is serving all the possible 40,000 corridors with the same ease and at a minimal cost, expanding the market by servicing the unexploited long tail.

Whereas the average Facebook contact list is flying high at 130 friends, the average contact list on Skype is in a single digit number. Skype users are stating that it is quite a difficult decision to add a new contact to their list because this means that they really want to talk to that person, thereby the setting the membership value extremely high, over that of the number one social network in the world.

Essentially targeted at Long Distance business, the most expensive call from a billing standpoint, telecommunication companies did not want to have a competitor in their backyard. But with a slow growth in volume (+4% over the past five to six years), and a declining retail price (-7%), International Long Distance represents today less than 2% of the total revenue of the telecommunication companies and keep declining steadily, minimizing therefore the impact of Skype as a business threat.

Skype has formed a different value proposition to its users: a free or marginal communication solution within a rich and intimate environment. It is important to note that most of those communications would not have happened in the first place otherwise.

Skype in the New Telecommunication Paradigm

Among the four main communication networks -- TV, Voice, Mobile, and Internet -- the latest has become the obvious choice for any exchange of digital information. Today all networks are migrating over IP, giving rightly the Internet its name of network of networks. But telecommunication service providers are still fighting to protect their core business while trying to adapt to the challenging task of maintaining a costly infrastructure.

Communications Over IP

Over the past decade, telecommunication companies have been migrating piece by piece their Voice network over to the Internet. This migration is well under its way, giving the opportunity to telecommunication companies to offer fixed line unlimited plan to local and over 40 different country destinations.

Additionally the mobile explosion, shifting more towards smartphones and fueled by the iPhone, and the ever increasing urban population migration, have made the switch from the Mobile network to Internet more difficult. The consensus among major telecommunication companies to switch over 3G-LTE (or sometime WiMax) will help resolve the bandwidth congestion while minimizing the operating expenses in relatively acceptable timeline, but still at an expensive cost for consumers around the world.

"People want to take their Skype conversations with them wherever they go, whether it’s on a PC, TV or increasingly mobile phones." — Josh Silverman, Skype’s CEO [Feb 16, 2010]

Skype made its name by initially serving the untapped International Long Distance (ILD) communication market, leveraging the PC as a communication device for consumers.

Today, by extending its strategy to new devices (TV and Mobile) the company is following the consumer trend: migrating from multiple, fixed and dedicated lines of communication to an all you-can-eat wireless content consumerism.

The battle between the Device, Pipes and Content providers has moved recently towards the application layer on the device platform. With a solid balance sheet, regulators' ears, an independent board and a strong executive team, Skype is now well prepared to take by storm their next Mobile over IP business challenge, and fight head-to-head with Google and its Google Voice offering in the consumer market space.

But this will not be the only battle that Skype will take on this coming year. By offering a new version of Skype for SIP and another for Asterix, the company is now positioning itself in the SME business and is embracing a more open and globally accepted protocol, leading the way for a future ecosystem development mimicking the ones of iPhone or Facebook.

With the help of its owners and potentially a new ally in the name of Avaya, Skype will then be able to tap into the Business market and will eventually propose to the low-end business sector an all communication service offering that could be seen as a potential rival of the major players that are Cisco, IBM, Siemens and Microsoft in the Unified Communications sector.

If it manages to stay independent until its probable IPO, Skype could arguably become a major player in the new Internet Communication sector in both the consumer and business market segments, feeding services that could make the transition from multiple connections and convoluted bills across multiple networks, to the single flat-fee and unlimited data communication line over the Internet -- what everybody is already dreaming of.